KARACHI: Private sector participation in the economy is now lower than what it was in FY23, which saw a negative growth.

The State Bank’s latest data shows the private sector has lost confidence in the banking system as it could hardly borrow Rs35 billion in the first nine months of FY 24. The amount for the same period in FY 23 was Rs264bn.

Before last year’s negative economic growth, the private sector borrowed as much as Rs1,330bn in FY22. That year recorded a six per cent GDP growth. Since then political uncertainty has gripped the entire economy and created more uncertainties for business.

The country was at the brink of sovereign default at the end of June last year, but was saved by the IMF’s $3bn Standby Arrangement.

Revival ruled out

Analysts rule out revival of the economy despite the inauguration of new governments at the centre and in the provinces.

Another cause of low borrowing by the private sector was a record high interest rate. The State Bank has so far kept the policy rate unchanged at 22pc during the entire FY24. Trade and industry representatives have been calling for a 50pc rate cut to make the cost of doing business viable for both domestic as well as exportable products.

Some analysts are confident that the State Bank will cut the interest rate by at least 200 basis points at the end of this month while some believe the rate will be cut by 100bps.

According to analysts, inflation has been declining of late and was below the policy rate last month. However, the average for nine months still hovers around 27pc.

Analysts believe rate cut is a must to help the private sector bounce back.

At the same time, banks made windfall profits in the 2023 calendar year simply through investment in risk-free government papers. The massive government borrowing has changed the country’s banking scene as banks are now least interested in offering loans to the private sector.

The new finance minister said recently that banks should start lending to the private sector to boost the economy.

Conventional banks recorded net debt retirement of Rs57bn in the July-March period of the current fiscal year, against a net lending of Rs270bn in the same period of last year.

Islamic banks were very active in FY23 as their lending during the first nine months was Rs432bn while it is just Rs57bn for the same period of FY24.

The Islamic branches of conventional banks improved their performance with a net lending of Rs35bn against net debt retirement of Rs438bn in the same period of last fiscal year.

Published in Dawn, April 7th, 2024